Stocks — Part XXXI: Too hot. Too cold. Not pure enough.

I write this blog for my daughter and, by extension, people like her. People who know getting investing right can make a huge, positive difference in their lives but who don’t want to obsess over it. For them I created the Stock Series and the book, The Simple Path to Wealth.

But, since this is primarily an investing/money/FI blog, it also attracts readers who do want to obsess over this stuff. As such, I get a steady stream of comments asking why not this, that or this other thing instead of The Simple Path as I’ve presented it.

So today let’s walk thru a few of these and I’ll briefly give you my take on each. This way I can just point future commenters to this post and be done with it.

I’ll start by saying, these concerns and ideas are not my concerns and ideas nor do I recommend them. If I did, they would have been in the Stock Series and book rather than the Simple Path to Wealth that is.

At the same time, if these concerns and ideas resonate with you by all means investigate further.

Too Hot

Regular readers know, I recommend investing 100% in stocks — ideally VTSAX — while you are in the Wealth Building Phase. Your high savings rate provides a steady cash flow from your earned income into your investments smoothing the ride and turning the stock market’s volatility to your advantage.

Then, when you leave your job and your portfolio is called upon to support you, you add bonds — ideally in VBTLX — to add ballast to smooth the ride. You set your stock/bond allocation to suit your personal temperament and risk tolerance. Periodically rebalancing this allocation serves to turn the stock market’s volatility to your advantage.

As I have said many times, a 100% stock allocation is extremely aggressive. It is designed for maximum returns over time and is absolutely dependent on you NOT panicking and selling when the market drops. You must understand that market drops, even severe ones, are an absolutely normal part of the process.

Like hurricanes they are intense, violent and scary. And, like hurricanes, they always pass. But if you panic and step out in the middle of the storm, none of the concepts I offer will save you.

This is something you want to think long and hard about. If you haven’t lived thru a major decline, if you haven’t watched your net worth get cut in half over the course of a few weeks with no bottom in sight, it is hard to fully describe how terrifying it can be. If you are going to follow The Simple Path, resolve now that selling in a downturn is simply never an option and don’t even let yourself think about it when it happens.

If your analysis leads you to believe we are headed for a multi-decade (or worse) economic disaster, you will certainly want to avoid following my approach.

But understand such things are “Black Swans,” that is, exceedingly rare and unpredictable events. However, there is nothing rare about people claiming to be able to predict them.

The question you must ask yourself is, Do I want to structure my investments for a 1% chance event or for the other 99% of the time? And if so, what exactly do you plan to invest in?

Because if you invest for a Black Swan and it doesn’t come, you run the risk of being very much worse off.

Finally, there are the market timers who claim I am misleading my readers by recommending they stay fully invested and ignore market drops. Wouldn’t it be better, they say, to sell before it drops and buy back in at the bottom?

Well, duh.

Problem is, no one can do this and those that claim they can are trying to sell you something or are delusional. How can I be so sure?

Nothing, and I mean nothing, would be more powerful than being able to time the market in such a fashion. You’d be far richer than Warren Buffett and far more lionized. Speaking of Buffett, he has this to say on the subject:

“The Dow started the last century at 66 and ended at 11,400. How could you lose money during a period like that? A lot of people did because they tried to dance in and out.”

But, humans being humans, some are forever trying. Indeed an entire segment of Wall Street is focused on “Technical Analysis” which purports to be able to predict future market moves.

Currently, the Shiller CAPE P/E Ratio seems to be in fashion. At least I have readers who keep pointing to it of late. As I write this in August 2017, it is around an historic high of 30 and these folks think it obvious that stock market prices must come down dramatically in order for it to return to the norm.

Of course, the “P” in the ratio (price) is only one half. The market, with its lofty valuations, seems to think it is the “E” (earnings) that will change to the higher and that this is what will move the ratio back toward the norm.

Beats me. I haven’t a clue what the market will do or when. Or how the Shiller CAPE P/E will return to “normal” if ever. This excellent article by Larry Swedroe suggests reasons it won’t:

I am, however, convinced that its predictive value is zilch. In 1975 the Shiller CAPE P/E was around ten and in the comments in this post one reader suggested that this made valuations back then “extremely attractive.” Maybe so.

But if you had acted on this metric and invested at that “extremely attractive” valuation in ’75 you would have had seven long, lean years ahead of you. Indeed, in 1979, you would have reached:

…before finally being rewarded with the start of a great bull market three years later in 1982.

P/E ratios rise and fall based on many factors in the market and in the economy. But they are not useful in predicting the market’s direction. But then nothing is. You cannot time the market.

If you disagree with me on this, God bless, God speed and good luck. Yer gonna need it.

Too Cold

When people aren’t chastising me for being far too aggressive, wildly optimistic and blind to the obvious disasters hurtling our way, they are wondering why I am so timid and why I am not preaching more aggressive approaches that have out performed sad little VTSAX over the last couple of decades.

Let’s be clear. There is no claim or prediction in this blog or in my book that suggests that VTSAX will be the single best performing asset in 5, 10, 15, 20+ years. There will always be something that does better. But what that something will be is unknowable as we sit here today and, when we reach that future date and know it then, it will have zero predictive value for the next chuck of time. Past performance does not guarantee future results.

What we do know is that it is exceedingly hard to best the broad market over time and the longer the time period the harder it is. The research shows…

–In any given year, somewhere between 20-40% of active managers will outperform the index.

–Go out 15 years and ~15% succeed in doing so.

–30 years out and the number who can drops to less than 1%, statistically zero.

Of course the real issue is that even though some do outperform over some periods of time, knowing which will at the beginning is impossible.

Further, even if you get lucky, as I did in the 1980s with Michael Price and his Mutual Shares fund, things change. When Mr. Price sold out to Franklin Templeton I and all the other shareholders were left with a dilemma:

Should we stay or should we go?

Price (likely as part of his $500,000,000 buyout deal) and Franklin Templeton made the case that we should stay. The argument was that the outstanding performance wasn’t the work of Mr. Price alone, but the result of the work of the team he had put together and, as such, it would continue. This was (and was proven over time to be), of course, nonsense. Besting the market for any length of time is exceedingly rare and is accomplished by exceedingly rare individuals, not by teams.

We saw this when Peter Lynch left the Magellan Fund and it is one reason I would urge caution to those of you who own Berkshire Hathaway.

These changes create the dilemma of then finding a replacement investment and, when held in a taxable account, paying the hefty capital gains tax due on the success.

For these reasons, and more (read the Stock Series), I dismiss the idea of actively managed funds out of hand. Thanks all the same, but I’ll hold VTSAX (or a similar broad-based index fund) and I’ll hold it forever.

More compelling in this “too cold” category is the fact that there are index funds out there that have outperformed VTSAX over the last couple of decades. If the idea is to buy and hold forever, why not chose one of those?

VSMAX (Vanguard Small Cap Index Fund) is one such. If you look at the chart going back to its inception in late 2000 until today you see it has returned just over 200% compared to VTSAX at just over 100%. Very impressive. And very tempting for an aggressive investor like myself. Maybe you, too.

If so, go for it. But keep a few things in mind:

Small cap stocks are by their size and nature more volatile than larger stocks. The gains are potentially greater, but so are the plunges.

Small caps have had a great run. But these things can go in and out of fashion. It might be that the large caps will rule the next decade or so.

It is easy to say, in the midst of a major bull market, that you will stay the course and not panic when the Bear comes growling. But unless you lived thru 2007-09 with major money invested and stayed the course, don’t be too sure. It is more terrifying and unnerving than words can express.

As for me, VTSAX is aggressive enough. Besides, I already have the “Too Hot” folks…

….about to tar and feather me.

Not Pure Enough

As I have pointed out many times, when you own a broad based index fund like VTSAX you by definition own a piece of each company held in the fund. Your piece may be tiny, but it is very real none the less.

There are some (maybe most) folks out there who are very uncomfortable with having ownership in certain companies and types of companies. I know I am.

My solution, and my guess is the solution for most following The Simple Path, is to maximize returns with VTSAX and then use part of those returns to Give Like a Billionaire to organizations that further causes that speak to our values.

That means, holding our collective noses and living with those companies in the index that give us pause. For some that is not enough, and for you the investing world has created…

…Socially Responsible Funds

The problem with these, as I see it, is…

When you ask your money to do more than make money for you, you are asking a lot. It is akin to having a swimmer compete while wearing a weight belt.

The vast majority of these funds are, and almost must be, actively managed. As you know from reading the Stock Series, actively managed funds have high fees (to pay those active managers) and as we saw above are almost always doomed to underperform.

Vanguard does offer a socially responsible index fund, VFTSX. Its ER (expense ratio) is .22% which is far lower than the active funds you’ll find in this category. But still, this is 5x higher than the ER of VTSAX which Vanguard recently dropped (again, Yay!) from .05% to .04%.

If we track performance since VFTSX started in mid-2000, we see it has returned ~49% to ~72% for VTSAX….

Only you can decide if you do more good in the world by avoiding the “bad” companies in VTSAX or by taking the extra profits from it and deploying them to achieve your social aims. I do know which my chosen charities would prefer.

But even with VFTSX, your definition of socially responsible investing might not be met.

For instance, it holds Wells Fargo and Bank of America. If you adhere to Islamic principles, which forbid charging interest, this isn’t going to work for you.

Its #1 holding is Apple. Perhaps the manufacturing of iPhones in low wage countries gives you pause.

You might also want to be sure your other holdings match your standards. I recently heard a woman rather sanctimoniously tout her selection of socially responsible funds over broad-based index funds while simultaneously bragging about her US Treasury bond still paying 8%. Either she…

…is completely comfortable with the policies of the United States Government, yet unwilling to own certain companies in the index

…appallingly ignorant of the investments she owns

…or breathtakingly hypocritical

The point is “socially acceptable” means different things to different people. The more precise your personal definition, the harder your search for an acceptable fund will be. And when you find it, you can expect higher fees and the performance trade off will likely be bigger.

For you, none of this might matter and that is a very personal choice only you can make. Just be sure you are making it with your eyes wide open.

Occasionally I am asked to read some book, article and/or blog and dispute the ideas in them. I simply don’t have the time or inclination to do this. I’m not the least bit interested in trying to persuade anybody of anything.

If you read my blog you’ll soon have a very clear idea of my views. You can then read other sources, compare and decide for yourself what resonates.

I may never write another Chautauqua post again. How could I possibly capture the magic and the essence as well as Firecracker does in the linked post above? Not bloody likely, to continue the British accent of this remarkable event from the week just past.

You’re more of an audio/visual type? Shane brought along a drone and Brandon (Not the Mad Fientist one) used it to create this 78 seconds of brilliance:

Brandon (Not the Mad Fientist one) also wrote this very personal post on his Chautauqua experience:

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Comments

As always, great insightful article, Mr. Collins. Your observations about Berkshire Hathaway are very interesting. I own, at least relative to my modest net worth, a sizable block of BRK-B. I’m sitting on a sizable capital gain (nice problem to have!) and have been thinking about selling off the stock and paying off my mortgage. I worry about Berkshire’s future once Buffett and Munger are gone. But, if they start paying a dividend, the stock price could go up substantially.

Not really seeking your advice, just wonder if you have any more detailed thoughts about the future of Berkshire.

However, I would not expect a dividend to move the stock price up. Dividends are only one way to return value to shareholders. In the case of Berkshire, having Mr. Buffett reinvest the money has proven a far better option. So, if anything, I would expect a dividend to decrease the stock price.

The video was fantastic. But the the link to the Firecracker Chautauqua post does not seem to be working.

I do have a hard time being 100% in stocks, but am about 80% so pretty darn close. About 60% of my stocks are in ETFs. I do hold some stocks personally. Some days I enjoy looking, some days I don’t. :O)

Once you have a firm enough foundation of knowledge to wonder if you should have a small cap tilt, hold international funds, or invest in a total bond or intermediate duration bond fund (yes, I listened to your most recent Choose FI podcast), you’re in a position where you’ll probably do well either way as long as you have the fortitude to stay the course.

I didn’t realize the Chautauqua was at Hogwarts. The place looks incredible. I may have to join you at one of these — I’ve heard good things about the Greek Isles.

🙂
sooner or later I am going to have to make it to a Chautauqua, the UK really looked magnificent. I am going to make a humble suggestion for the new country. We have happily moved to Cascais, Portugal this month after a two months trial period. This country offers a very good combination of affordability and amazing settings; is a very accessible european hub, has good infrastructure and is rapidly becoming very popular as a relocation destination. Obviously, should that happen, I would be happy to volunteer local organizational assistance.

I’m a huge fan of VTSAX after you introduced it to me. I’ll keeping plowing money into it and if the market drops so be it. I’ll be happy to pick up cheaper shares during this wealth accumulation phase 🙂

I’ve been following your blog and found you through the Mr Money Mustache blog. I am ready to invest in vanguard index funds. I live in Canada, so which Canadian Vanguard index fund would you recommend as the comparable Canadian version to the VTSAX index fund and the VBTLX bond fund? In Canada we cannot buy direct yet with Vanguard, but can purchase the Vanguard index funds through our Banks.

Hi Amanda, VUN is the Canadian equivalent of VTSAX and VAB is the Canadian equivalent of VBTLX. If you want to currency hedge, it’s VUS instead of VUN, but we tend to stay away from currency hedging as it adds more complexity and fees in the long run.

Another quality post, Godfather. In this day and age, we can’t just “whack” those that aren’t in full agreement with us ( unfortunately ). Or can we? At any rate, it appears this piece had a hint of Old English ( not the cologne ) to it..perhaps your time in the UK had something to do with it…sure looked like a lot of fun. The Chautauqua is a bit of a sore subject for me as I stalked my way onto the Ecuador waiting list…only to get an email invite from Cheryl…only to find out the spot was instantly taken like a cruel stock market flash crash. 🙂 I guess it speaks to the wild popularity of these events. Next time…

Jim,
Thank you again for making investing simple and easy. I have shared your blog and your books (I think I have purchased at least 5 copies for family and friends!) any chance I get. It still amazes me how many people I talk to say that they are concerned about investing in the market since it has moved so high. They say they are waiting for the market to go down. My response is always, if we could time the market most of us would already be rich….
Thanks!

Could the behavioral economics folks have an explanation for this? We naturally weigh loss more heavily than gain. Thus the decision function is weight-of-loss*1% vs weight-of-gain*99%.

During the 2008 meltdown my losses were $0.00 because I ignored the market value of my mutual funds. Happily, I’ve been able to avoid forced sale of equities in a down market. I intend to subsist on catfood before I do that. (Murphy will do his best to exploit any gaps in my planning.)

Love the way you split it into “Too hot”, “Too cold” and “Not pure enough”. Also the fact that you don’t give a rat’s ass about what people think (or don’t) about these and your recommended strategies. 🙂

Jim,
Loved it. I continue to see massive wholes in my thinking. Re-reading and re-reading is so enlightening. Thanks for this massive piece of wisdom.

I think it’s important to point out that in this approach to investing, you don’t have to worry about Black Swans. The “Black Swan” is an idea created by Nassim Taleb which says slim chance events are unpredictable and are massively influential. His latest book is called Antifragile, and he talks about how to live in a world where black swans dominate. Basically what he says is you have to first become robust, which means strong/ resilient, and then design a system that is not destroyed by a black swan, which he calls anti-fragile.

So if you’re afraid of the US economy failing you wouldn’t not invest, you would do something like living on 50% of your income, take 25% of your income and invest in index funds, invest, and then use other 25% to build in an under ground bunker, multiple go bags, fresh water and gold. That way you would have covered all of your basis. Even at that rate over the long term you’d still retire wealthy, but if the apocalypse happens you have all the supplies you need, and anything extra (such as extra food) can now be traded for other goods. You’re set up to prosper either way.

It’s one of my favorite books. He also has a great quote:
“This kind of sum I’ve called in my vernacular “f*** you money” a sum large enough to get most, if not all, of the advantages of weath… but not its side effects, such as having to attend a black-tie charity event and being forced to listen to a polite exposition on the details of a marble-rich house renovation.”

Yea, didn’t mean to go all fan boy on you there. Basically, it all comes back the what you’ve said about the monk and the minister. The more you’re comfortable living like a monk the more antifragile to black swans are.

Loved the analogy comparing the hurricane to a stock market drop. It’s stuff like this that makes your writing so great to read.

And I need to second Mr. 1500 above…a few months ago had a discussion with a few other people on this idea of a “black swan” event. By definition, they’re impossible to model, and one person was asking why we even have models if these events are possible. This irked me (I’m a statistician, so essentially my entire life is models), and you hit the nail on the head why. If only I were that eloquent, our discussion may have ended much sooner than it did.

Well done, thanks once again Jim!! I’m always so impressed with the way you are able to reiterate the major points, with enough new points to always keep it interesting, and really build this brick wall of an argument. I did diversify into VSMAX for a while, but it was bugging me how it was underperforming VTSAX so I went back. My wife is much more inclined to pick the socially responsible fund, so we put her “all-in” with VFSTX back when I saved her from the raping / pillaging expense-fee pirates of Edward Jones. It’s been 3 years and she’s still out in front of me (as measured by 3-year avg annual gains) by three-quarters of a percentage point. She gets that there are still companies that she may not be fully onboard with, but her number one concern is global warming, and so not being in a position of owning the major fossil fuel companies is highly desirable, and I think this fund achieves that.

Thanks Jim. I read your book for the second time and shared it on my Facebook timeline. Holding VTSAX for the long haul is excellent advice. I plan to stay the course with Vanguard Total World Stock Index (VTWSX) forever. I am grateful for Mr.Bogle and respect him immensely but the only thing I disagree with him on is home country bias. I sided with Vanguard for the diversification advice. Investors will do just fine going with any one of those funds for the long term.

At Chautauqua I had a very interesting conversation about this very thing.

Eduardo is a Brazilian living in the UK and about to move to Malta. Like you, he prefers to hold VTWSX. In his shoes, I’d do the same and over the decades he (and you) will do just fine. My guess is Mr. Buffett and Mr. Bogle would both agree.

If I were ever to be tempted away from VTSAX, VTWSX would get the call.

But for now, especially since its ER is 5x that of VTSAX, I still don’t see the need.

I’ve avoided Berkshire in recent years for exactly the reason you mentioned — Warren is definitely getting up there in years. While I have no doubt the company will be stable/profitable in coming years, outperformance seems less likely. It’s size and a potential loss of talent may put some weight around the ankles of the company’s performance.

When it comes to taking the market’s “temperature” I prefer to be prepared for a number of different possibilities. If they market crashes tomorrow, I’ll be ready to buy. If the market reaches new highs I’ll also enjoy the gains. Who knows what tomorrow will bring?

Thanks Jim, nice to have you reiterate the importance of simplicity once more. Much needed in my case.

One question: shouldn’t “go out 15 years and >15% succeed in doing so.” have a “<" character in it instead?

A quick search yielded percentages ranging from 18% to just 10% of active funds managing to beat passive funds, so I'm not too sure. It being stated like that just seemed off to me (as it doesn't narrow down on the previous line).

I just wanted to express my deepest thanks to you, Mr. Collins. Over the past year I have been reading your fantastic personal finance blog (and your book) and it’s truly changed the course of my life.

Before last year, I was deeply worried about my financial future. While I had always been a saver and scrimped, I didn’t know anything about investing and was too afraid to do any sort of it. I worked at an average job, earning an average income, and simply assumed there’d be no way I could save for retirement, let alone before the age of 65.

After a fantastic last year of saving and investing, I’m now on track to reaching financial independence within the next ten to fifteen years, at the ripe old age of ~45 years old. This simply wouldn’t have been possible had I not stumbled upon your site and its wealth of information.

I can’t express just how grateful I am for this site and your knowledge. Please know that all of your hard work is so appreciated – I’m sure I’m not the only one who’s life has been forever changed.

Great post…
I must admit I was one of the those “What if the US goes the way of Japan and suffers a multi-decade economic malaise?” people.

Being a nervous nelly is not part of my investment plan which I built with the help of your blog, MMM and a few other sites.

Now I just follow my plan with it’s asset allocation and stay optimistic. My investment plan does not have a “Black Swans,” clause. Even if it did how would I know when to implement it unless the affects had lasted 10 years or more?

That comic was done by the same guy who wrote my all time favorite take on my book:

“In the dark, bewildering, trap-infested jungle of misinformation and opaque riddles that is the world of investment, JL Collins is the fatherly wizard on the side of the path, offering a simple map, warm words of encouragement and the tools to forge your way through with confidence. You’ll never find a wiser advisor with a bigger heart.” — Malachi Rempen: Filmmaker, cartoonist, author and self-described ruffian

I am relatively new to your blog. Although I had read several references to it in MMM (which I stumbled upon in 2012), it has taken me a while to migrate over. I became obsessed with MMM’s blog (he once did a case study on me after a rant I posted in a comment one time) and I’ve been hooked ever since. I have, however, branched out and am getting into other interesting, educational, informative, and highly entertaining blogs, such as yours. F-You Money…HAH! Nothing beats that.
Anyway, can you point me in the right direction regarding finding out more about the Chautauquas, and how to get to go on one? Is it an event that is by invitation only? By application? Any information, links, etc., would be appreciated.
Thanks for the time and effort you put into this blog, and for all the unbelievably solid advice you so generously provide. I can’t buy VTSAX in Canada, so I buy VUS instead.
Regards,
Howie (Dharma Bum)

I looked at “ethical investing” ( which is socially responsible investing), and came to the conclusion that it is impossible to do. This is the conclusion I reached:

“Investing for a profit is very difficult as it is today. By applying arbitrary rules in investment selection, that have nothing to do with the underlying profitability of the business, you are essentially limiting yourself to never investing in anything. Your goal as an investor is to earn money, and not to be a moral/ethical arbiter for the world. If you don’t want to invest in certain companies, don’t do it, but you have to realize that what you see as moral or ethical, might be viewed as unethical by someone else and vice versa.”

As far as valuation, I agree that CAPE is not a good forecasting tool. Based on high CAPE you would have been out of stocks since the 1990s. Based on forward earnings, P/E on S&P 500 is 18.70 for an earnings yield above 5%. When long-term Treasuries are at 2% – 3%, stocks look pretty nice as long-term investments.

On a side note, I agree with you that a lot of international exposure is overrated. If you had bought international index funds 20 – 25 years ago, you would have done poorlier vs buying S&P 500 or VTSMX.

Last but not least, when you compare mutual fund performance, I would do it in Morningstar, rather than Yahoo Finance, since the former looks at total returns, while the latter only focuses on prices and ignores the sweet dividends.

I mainly hold index funds, but I am considering buying 1 share of the Berkshire B so that I can attend the shareholder meeting. I think it would be an incredible learning experience. I’ve also never been to Omaha 😉

Love the Book and the Posts. It’s life changing! Quick question Jim. I have 2 jobs, civilian and also a military reservists. For the mil job in TSP, a mixture of 80% C and 20% S is pretty much VTSAX. In your book, you said that you would just stick with the C fund in the TSP, which is the S&P 500 index. For my IRAs, what’s your opinion on considering that same strategy by going Vanguard VFIAX (S&P 500) instead of VTSAX? I’m in for the long haul!

Jim,
I have read most of the stock series and I get the feeling I’m missing something. When you decide to withdraw money to make a purchase while still working a career job , how do you avoid capital gains taxes? Or is the whole point of stock investing in taxable accounts that you have to suck it up and pay the taxes when you withdraw funds?

Anytime you sell shares in a taxable account you are liable for paying tax on the capital gain, if any. If you have a capital loss you can deduct it against any capital gains you have and then up to $3000 in earned income. Any loss over that you can carry forward to use in future years.

The good news is that capital gains taxes are lower than ordinary income taxes and for those in the 15% bracket or less they are zero.

But investing in stocks is for the long term and so, ideally, you don’t sell until you are living off your portfolio and then only a small bit each year.

Ideally your holding period for something like VTSAX is forever. Then, when your heirs receive it, the basis is stepped up to the current value and the capital gains taxes are avoided completely.

Just dropping a note to say thanks! And a question at the end of this post.

My parents, Baby Boomers, always told me: “save your money”. However, they never told me what to do with it other than save it. I always thought investing in the stock market was equivalent to putting my money on”13″ and spinning the roulette wheel at the global casino.

I’m 43 and I’ve always held mediocre jobs making mediocre money. I got a decent job a few years ago and I’m now making “OK” money in my mind (about $63K/yr). I never got a degree and I have no debt. A coworker told me about your book and I bought myself a copy as a birthday present a couple of months ago.

I wish I had this information years ago!

I immediately opened a Vanguard account and put money from my savings account into a Roth IRA ($5500 in VTSMX) and a regular brokerage account ($14K in VTSAX). I have a separate bank account for emergencies. I’m also putting $675 every two weeks into my 403b (Vanguard Institutional Target Retirement 2040 Fund (VIRSX)).

I feel amazing! Again, I wish I knew about this decades ago so I could have had my money doing SOMETHING all this time!

I have another $15K that I can invest. I’ve held off a little because this is all relatively new to me. Should I put it all into my regular brokerage account (VTSAX) or should I look at some amount of bonds?

I’ve been going back over the book and making notes in the margins. I’m treating it like a text book!

I knew you were going to say put the money into VTSAX, to be honest. For some reason, I’ve just been thinking that I need to do something else. But, I need to get it through my skull that it truly IS just “a simple path” and I need to follow the K.I.S.S. methodology.

As I mentioned in my previous post, this is all so new to me and I want to check out all these nifty options. Your words from the book keep ringing in my head “don’t mess with it” and “I’ve never been able to pick stocks, neither can you”. Then I close the browser windows full of stock/ETF/IPO info and open a new window back to your blog and re-read.

For someone who started late (early 40s), is it suggested to stick with VTSAX to build retirement wealth, or would a Target Retiremend Fund be a better choice?

If I have a small amount in a Target Retirement Fund (in a 403b), should I move it into VTSAX, or keep it where it is since that will eventually be where the bulk of my investments will end up over time?

In your book, and blog, you stand behind both for retirement planning. In the case of late starters, is one a better play than the other? Or is it basically a wash over 24-25 years, which is about how much time I have left before I hit age 67?

Great post Jim! I understand why people look for holes in the “simple” way to invest. It is probably because the method appears too simple to be effective! I am following the 100% VTSAX philosophy during wealth accumulation process. I also just got your book – A Simple Path to Wealth and will probably devour it pretty quick! Thanks for the great post again!

At the risk of lumping myself in with the “too hot” crowd, I’m going to stick with my plan to hold an 80/20 split of stocks/bonds, even now as I accumulate. Not because I disagree with your analysis in anyway (over long term, VTSAX should outperform the bond portion), but because (a) it allows opportunities to rebalance (essentially a mechanism to make sure you buy high and sell low), and (b) the ballast in my portfolio from crazy market drops will help me sleep at night and stay in the market when it drops (I’ve never sold, period, even in 2007-2009, but then again I had far less invested back then than I do now…)

First of all, thank you very much for taking the time to write this very thorough and (financial) life changing blog.

For a while I’ve felt like something was missing. I live in London (UK) and for a while I’ve been feeling like my savings should be working for me. I just didn’t know how to do it until I found your Stock Series.

Since then I’ve been avidly reading it and I’m happy (can I be proud as well?) to announce that I’ve now invested all my savings into 2 Vanguard Index Funds! I know I’ll be able to ride the lows of the market, so I’m confident that stash is going to keep growing ad infinitum.

So, again, thank you. Your blog is the reason I now feel like the money I earn will allow me to achieve Financial Independence one day.

I do, however, have one question. Since I’m based in the UK your beloved VTSAX isn’t available to me 🙁

Of all the funds that Vanguard sells in the UK there’s two that I think more closely mimic your investing philosophy:

1. Vanguard U.S. Equity Index Fund (Ongoing charges 0.10%)
The Fund seeks to track the performance of the Standard and Poor’s Total Market Index (the “Index”)

2. Vanguard FTSE Developed World ex-U.K. Equity Index Fund (the “Fund”) (Ongoing charges 0.15%)
The Fund seeks to track the performance of the FTSE Developed World ex U.K. Index (the “Index”).

If you were in my position investing in GBP and living in the UK would you still just get the Total Market US Fund? And would you do so simply because the fees are smaller in the US fund (0.10% vs 0.15%) and the returns likely to be similar to the DEV World fund? Do you think there is any disadvantages to investing in the US fund while living abroad and living on a different currency?

Any insight into what you might do in my particular situation would be extremely helpful. I feel like I’ll be alright with either fund, but would be interesting to hear your thoughts!

A little off topic here – I believe you also used to follow Mike at lackingambition blog. He seems to have disappeared for some time now. Do you have any idea how he’s doing?
I really liked following his progression towards FI, and hope he’s ok.

Thanks for this! Finally, I can just point people here when they make these objections. I usually tell them to read the whole series, but this is perfect for folks who I know don’t want to read that much 😉

(Regarding the CAPE): “I am, however, convinced that its predictive value is zilch.” Thanks for talking a little sense there. It’s not a useless metric, but the road to failure is paved with people predicting (with one “reliable” tool or another) market drops.

I have to say Jim you pull people from zero financial knowledge to “well armed” very well, thank you. While we disagree on some points, you’ve done an excellent job on getting people headed in the right direction. Thanks.

Now, on to a specific question: Regarding Berkshire Hathaway. Do you get nervous with any genius leaving a company, or specifically Warren Buffett? On one hand, he’s surrounded himself with very capable, hardworking intelligent people. On the other hand, he -is- Warren Buffett. That Munger guy isn’t too bad either. Do you really think the company will suffer greatly when they go? I was shocked when Buffett said at this year’s shareholder meeting he thought the stock would go up if they announced he died. Instead I’d figure a 10-20% drop that day. But again, predicting those drops is a loser’s game.

My guess, and it is only that, is that BH would do just fine under Munger alone, but he’s older than Buffett. When they both pass, I wouldn’t expect the company to instantly crater — more a slow retrogression to average.

Buffett saying the stock will go up on his death strikes me as false modesty. Becoming perhaps, but unlikely to be true. Mostly, I’d guess – there I go again – he is just saying what shareholders want and need to hear.

When the time comes, I’d expect a slight drop offset by reassuring talk from all those “very capable, hardworking intelligent people” followed by a long, slow decline.

But then, when it comes to predicting what any given stock will do, I am almost always wrong.

Buffet is an idiot savant. He’s a strange man with abnormal analytical skills. He is a weird guy. His wife even left him, and a surrogate wife took over her role.
Buffet IS Berkshire Hathaway.
You can’t teach the skills he has.
He is The Oracle. When he passes, BH will eventually be history.

I’ve heard more about the Shiller CAPE ratio in the last few months than ever before, especially since I’m taking a Portfolio Management class at school! Thanks for, lucidly, putting it in perspective.

Thanks Jim. I have been distressed about passive investing for a long time, though I am doing it, because it means making money from things I don’t believe in. But actively managed SRI funds come with their own serious problems. I have been circling this problem for a long time, too long. Your solution never occurred to me-give money like a billionaire! I will make arrangements for this in my will. Case closed. I can sleep better now. Thanks friend.

New reader here. I am a vanguard fan as well, its great that you are making my belief system stronger.

What do you think about bitcoin and the cryptocurrencies? I know you would not suggest anyone to invest in them but I am more curious to know what is the future for them? How to make sense of the insanity of the bitcoin?

Hi!
I’ve spent the last 5 months obsessively reading many FIRE/personal finance blogs including your entire stock series and most of your other posts. I’ve learned so much and made lots of changes to our investments based on what I’ve learned. And now I have some questions if you have the time to answer them…
From what I understand, you can retire at any age once you have saved 25 times your annual expenses, you only withdraw 4% or less per year, and your asset allocation is roughly 75%stocks/25%bonds or even more aggressive. Does this sound right? (I read the original study showed the 4% rule worked for 30 years with a 50/50 allocation). According to you, is this 4% adjusted for inflation annually? If so, how does one actually adjust for inflation? And if the market tanks and your net worth drops by half, then the 4% you withdraw after that crash will be half of your prior year’s annual withdrawal, correct?
Now say hubby and I want to live on 50,000$ per year and so we need to save 1,250,000 for our net worth. Following the 4% rule most of our net worth will still be around when we die, in most cases, if I understand correctly. But what if we don’t want to leave 1 million++ dollars behind when we die? Is there some other rule we can use so we can slowly use up the bulk of our money, leaving a decent cushion (several hundred thousand dollars) behind near the end of our lives, in case we live much longer than expected? I’m 40 and he’s 50 but we’re not retired yet. I read the WARM strategy but we likely will still keep a good chunk in stocks even when retired so that won’t work for us. In all the blogs I’ve read, I can’t find anyone who talks about this – using up most of the money that one has saved over their life. All the giving we do, we’d like to do while alive.
Thanks again for your clear advice and all the time and energy you’ve put into this blog. I hope your daughter appreciates it all one day :). My dad tried to talk to me about finance for years and it always bored me to death and I never listened. I have no idea why, but all of a sudden, I really got into it and find learning about money to be very empowering as a woman. I think all of these blogs make it very accessible and easy to understand, especially yours!

Your understanding of the 4% rule seems solid, but I would suggest you are overthinking it a bit. Think of it more as the 4% guideline. Truth is, when you look at the Trinity Study, in the vast majority of time higher withdrawl rates work as well. This will be especially true given your goal of dying nearly broke.

Why not just draw what you like each year, keeping a close eye on your balance, age and health?

Hello Jim! Nice to see you still continue to take time and respond to your comments section, highly appreciated! I really enjoyed your book and I’m trying to put it into action as quick as possible. Tonight I was looking over my 401k options as my company uses Fidelity. Unfortunately I do not have Vanguard options available, wanted to see what you would choose out of this group to get me as close to your VTSAX portfolio as possible so I can set it and forget it. Currently I am contributing up to the 6% employer match but in 2018 I plan on maxing out my 401k. Thank you for any suggestions and advice! PS: Can’t wait to hear you continue to work with the ChooseFI podcast as well, I have really enjoyed your guest appearances!

Would you just put everything in the US Large Company Index Fund? Definitely the best on fees.

This is what that fund description says: What it is: A passive portfolio managed by Mellon Capital Management Corporation (a member of the same controlled group of corporations as The Bank of New York Mellon) which seeks to mirror the returns of the S&P 500® equity market benchmark. The fund may maintain a
portion of its assets in short-term debt instruments, money market instruments and derivatives (for example futures and options) for cash management purposes and to assist in tracking the S&P 500 Index.